Clearing House
AdvancedA clearing house is an organisation that sits between buyers and sellers in financial markets, confirming and processing trades, and in many cases guaranteeing their completion if one party defaults.
When large numbers of trades take place, clearing houses make settlement more efficient and safer. They match and confirm trade details, calculate how much each participant owes or is owed, net trades so only the final amounts need to be paid, and arrange settlement.
Many clearing houses also act as central counterparties, becoming the buyer to every seller and the seller to every buyer. This means each participant's risk is with the clearing house rather than with many different trading partners.
For example, on a futures exchange, the clearing house collects margin from traders each day based on their gains and losses, so that losses are covered before they can build up.
Clearing houses exist for shares, bonds, derivatives, foreign exchange and payments, such as cheque and bank transfer clearing. Because they concentrate risk, clearing houses must have strong risk management, including margin requirements, default funds contributed by members and plans for handling the failure of a member.
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